1099MISC with subs refusing to give social security #

[kpangelinan]

Client needs to file 1099MISC on some independent contractors who are refusing to give their social security numbers and fill out a W9. I've always recommended clients get a W9 signed prior to any payments, but this is of course after the fact.

Is there a process the client takes to filing these with the IRS (1099's and 1096). Like sending a letter or is there a form to fill out?

Thanks,

[Lion]

Have client phone contractor and explain, including $ penalties. If no response, have client mail the W-9 with return receipt requested. If still no response, then mail contractor Form 1099-MISC with "refused" for his tax ID number. If still no response, file Forms 1099-MISC with IRS. Warn your client of HIS penalties for not getting the W-9 before making payments.

[Bees Knees]

Page 6 of the general instructions for Form 1099 says:

If the recipient does not provide a TIN, leave the box for
the recipient’s TIN blank on the Form 1097, 1098, 1099,
3921, 3922, 5498, or W-2G. Only one recipient TIN can
be entered on the form. Backup withholding may apply

It then refers you to the backup withholding instructions that basically say to start backup withholding.

It is interesting to note that nowhere in the instructions does it say you have to secure a W-9 prior to making your first payment to the recipient. It merely says if the recipient fails to furnish you a W-9 with the TIN, you have to start backup withholding.

So in your case, I would simply issue the 1099-MISC to the recipient and IRS with the TIN box blank. I would also attach a note to each stating the recipient refuses to return a W-9 with a valid TIN. You might also inform the recipient that there is a $50 penalty for failure to furnish a TIN, and that he/she should expect correspondence from IRS concerning this.

[Burke]

You might also inform the recipient that there is a $50 penalty for failure to furnish a TIN, and that he/she should expect correspondence from IRS concerning this.

Except that he/she won't get any, in my experience. But the backup witholding notification does do wonders in obtaining the SSN/EIN's. Although that is only if you are paying them in the future. Bet the client won't make that mistake again. It's something I harp on over and over, and it just doesn't seem to sink in with some people.

[kpangelinan]

Thank you!

Have client phone contractor and explain, including $ penalties. If no response, have client mail the W-9 with return receipt requested. If still no response, then mail contractor Form 1099-MISC with "refused" for his tax ID number. If still no response, file Forms 1099-MISC with IRS. Warn your client of HIS penalties for not getting the W-9 before making payments.

A good route to go.

Page 6 of the general instructions for Form 1099 says:



It then refers you to the backup withholding instructions that basically say to start backup withholding.

It is interesting to note that nowhere in the instructions does it say you have to secure a W-9 prior to making your first payment to the recipient. It merely says if the recipient fails to furnish you a W-9 with the TIN, you have to start backup withholding.

So in your case, I would simply issue the 1099-MISC to the recipient and IRS with the TIN box blank. I would also attach a note to each stating the recipient refuses to return a W-9 with a valid TIN. You might also inform the recipient that there is a $50 penalty for failure to furnish a TIN, and that he/she should expect correspondence from IRS concerning this.

This is of course prior to paying....meaning withholding from their checks. When it's after the fact, the recipients of the money do not care.

But, yes, we'll go ahead and issue it blank with a note as you suggested....kinda what I was thinking.

Except that he/she won't get any, in my experience. But the backup witholding notification does do wonders in obtaining the SSN/EIN's. Although that is only if you are paying them in the future. Bet the client won't make that mistake again. It's something I harp on over and over, and it just doesn't seem to sink in with some people.

Correct...for future payments, it will be easy with these subs, but like you, no matter how many times I harp on my clients about it, it never sinks in.....now that the Schedule C AND the 1120's have those questions on there about whether they were required to 1099 and if so, are they planning on sending them in or have they already sent them in is opening up plenty of eyes!

Thanks again!

[Golden Rocket]

Not Doing Their Job

Except that he/she won't get any, in my experience.

In my experience, I have to agree with Burke. Nothing ever seems to happen. IRS could stop this by enforcing the $50 penalty, and chasing down (to the extent they can) people who give out phony numbers or no numbers at all. Some of them do leave the area, but most of them still hang around where they are working odd jobs and continuing to work under the table.

Same thing with people who rush down to e-file their taxes and claim a child to which they are not entitled, forcing the legitimate parent to file a paper return. Both receive letters stating the child was double-claimed, but IRS doesn't do a thing to investigate and award the deduction to the proper person, then collect from the fraudulent party.

They are more interested in computerized interceptions that don't work correctly, chasing down preparers for penalties, etc. than getting out and being really effective.

[kpangelinan]

Update and Thanks!i

I mailed, as POA of the client, the two contractors a letter to each explaining what could happen to them and asking for the W9's.

Both immediately sent me the W9's all filled out and signed.

I mailed them their 1099MISC's and the client signed and mailed out the 1096.

Thanks again for the suggestions and tips!

[OtisMozzetti]

In my experience, I have to agree with Burke. Nothing ever seems to happen. IRS could stop this by enforcing the $50 penalty, and chasing down (to the extent they can) people who give out phony numbers or no numbers at all. Some of them do leave the area, but most of them still hang around where they are working odd jobs and continuing to work under the table.
...




Same thing with people who rush down to e-file their taxes and claim a child to which they are not entitled, forcing the legitimate parent to file a paper return. Both receive letters stating the child was double-claimed, but IRS doesn't do a thing to investigate and award the deduction to the proper person, then collect from the fraudulent party.

They are more interested in computerized interceptions that don't work correctly, chasing down preparers for penalties, etc. than getting out and being really effective.

This is in reply to the second half of your statement, Golden Rocket. In my experience, it may be true that the IRS does not jump into conducting investigation of the duplicate claim of a dependent or qualifying child. What the IRS seems to do following the letter stating that the child was already claimed is to await the requested documentation of the validity of the claim. Maybe what you are saying is that the IRS does not get around sufficiently often to assessing penalties for the claim if that claim turns out to have been unsubstantiated.

[taxmandan]

Same thing with people who rush down to e-file their taxes and claim a child to which they are not entitled, forcing the legitimate parent to file a paper return. Both receive letters stating the child was double-claimed, but IRS doesn't do a thing to investigate and award the deduction to the proper person, then collect from the fraudulent party.

TheIRS does eventually resolve the matter after investigating and determining the person entitled to the exemption. Had a client who's ex-husband claimed their child, the IRS then seized his refund for back child support owed to my client. She was the custodial parent and the IRS eventually made that determination and changed his return to reflect a higher tax and he had to pay back the refund! My client got the child deduction AND the back child support. Win, win for her!

[kpangelinan]

TheIRS does eventually resolve the matter after investigating and determining the person entitled to the exemption. Had a client who's ex-husband claimed their child, the IRS then seized his refund for back child support owed to my client. She was the custodial parent and the IRS eventually made that determination and changed his return to reflect a higher tax and he had to pay back the refund! My client got the child deduction AND the back child support. Win, win for her!

Love hearing stories like this...glad it worked out for your client.

But yes, eventually, it gets worked out. It can take several months though.

[Gary2]

The issue with collecting penalties (over and above the usual P&I) is that there isn't always fraud, and even when there is, it's difficult to prove.

For example, when the AGI tie-breaker rule is invoked, there's generally no fraud. The person losing the tie can't be assumed to know the other person's AGI. Or if a person doesn't know about the 8332 rule, and mistakenly believes it's his or her year to properly claim a child, that's not fraud either. And when the person does understand the rules, but asserts they didn't, how can the IRS prove fraud?

While I believe there is a significant problem with people claiming a dependent when they know they don't have the right, I've seen my share of honest mistake cases. So the question then is when does it become worth the IRS's time to separate the honest mistakes from the fraud? I'm not surprised if it takes multiple violations before the IRS will take action.

[kpangelinan]

The issue with collecting penalties (over and above the usual P&I) is that there isn't always fraud, and even when there is, it's difficult to prove.

For example, when the AGI tie-breaker rule is invoked, there's generally no fraud. The person losing the tie can't be assumed to know the other person's AGI. Or if a person doesn't know about the 8332 rule, and mistakenly believes it's his or her year to properly claim a child, that's not fraud either. And when the person does understand the rules, but asserts they didn't, how can the IRS prove fraud?

While I believe there is a significant problem with people claiming a dependent when they know they don't have the right, I've seen my share of honest mistake cases. So the question then is when does it become worth the IRS's time to separate the honest mistakes from the fraud? I'm not surprised if it takes multiple violations before the IRS will take action.

Possibly....but most of the cases I've been involved in in wrongfully claiming a dependent had to do with blatant fraud, meaning they just took the child to get the EIC....and in almost every case, the child never lived with them, so in cases like these, there shouldn't have been questions beyond that about the EIC anyways....you can get into honest situations where AGI tie-breaker rules needed to be applied and they didn't know for claiming the exemption, but like I said, in my experience, it's been the EIC that people get aggressive and greedy about in order to get and rush their big refund check.

[David1980]

Same thing with people who rush down to e-file their taxes and claim a child to which they are not entitled, forcing the legitimate parent to file a paper return. Both receive letters stating the child was double-claimed, but IRS doesn't do a thing to investigate and award the deduction to the proper person, then collect from the fraudulent party.

I've seen a return where it basically went through 3 years like this (I was not the preparer).

Year 1: Non-custodial parent claims kids, gets EIC, refund check comes as expected.
Year 2: Non-custodial parent claims kids. Gets rejected, must file 8862 (someone should have taken a hint), return refiled with 8862, gets EIC, refund check is partially offset for IRS debt of some kind...
Year 3: Non-custodial parent claims kids. Gets rejected. Taxpayer not allowed to claim EIC that year.

Not sure if it were a 2-year or 10-year disallowance on EIC, probably a 2-year I would guess, though if the taxpayer continues to claim the kid for EIC I imagine it will turn into a 10-year disallowance.

It was refreshing to see something actually happening. Of course, I assume the other parent was also claiming the kid which is how the IRS knew - I'll bet a lot of this goes on where dependents are claimed that shouldn't be and so long as nobody else claims the same kid it probably stays under the radar.

[joanmcq]

Unless it's a 50/50 custody arrangement where the parents are counting days down to the wire, the noncustodial parent should KNOW they are not allowed to claim the child without the express permission (by way of the 8332) of the other parent. Any preparer worth their license (another point for mandatory CPE) will know the questions to ask. If the taxpayer lies to the preparer, its fraud.

The noncustodial parent knows they are not. And I'm glad to see these cases followed up on by the IRS, flagged if it's EIC, and the money eventually returned.

Canada manages to pre-audit most of their returns. Even a quick review of returns with EIC, refundable ATC, etc. would result in taxpayer savings WAY beyond the cost of a preaudit (heck its about 5K or more a pop?). And the new identity theft fraud that has become rampant is built upon the refund first, ask questions later attitude. The american public may be conditioned towards quick refunds-and in most cases with the refund being withholding, it's justified. But when it's a refundable credit, it's free money. The public can be de-conditioned. The homeowners and adoption credits may have been a pain, but with the dollars at stake, a bit more due dilligence on the IRS (and congress for their large part in it) could save billions.

[JohnH]

Yes, they save billions but lose votes.
What's a few billion wasted when it helps you keep your cushy government job with all the perks & power? Congress would never allow any meaningful reform, even if IRS were inclined to undertake it. Just hold hearings every now & then, bluster a little about "waste & fraud", and slide the whole issue under the rug.